EPAM Systems, Inc.

Good day, everyone. My name is Michael and I'll be your conference operator today. At this time, I would like to welcome you to EPAM's first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, and if you have joined via the webinar, please use the raise hand icon now, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to Mike Richandle, Head of Investor Relations.

Good morning, everyone, and thank you for joining us today on our first quarter 2026 earnings call. As the operator just mentioned, I'm Mike Reschandle, head of investor relations. We hope you've had an opportunity to review our earnings release we issued earlier today. If you have not, copies are available on epam.com in the investor section. With me on today's call are Balazs Fayesh, CEO and President, and Jason Peterson, Chief Financial Officer. I would like to remind those listening that some of the comments made on today's call may contain forward-looking statements. These statements are subject to risk and uncertainties as described in the company's earnings release and SEC filings. Additionally, all references to reported results that are non-GAAP measures have been reconciled to the comparable GAAP measures and are available in our quarterly earnings materials located in the investor section of our website. With that said, I will now turn the call over to FB.

Thank you, Mike, and good morning, everyone. It's a pleasure to be here with all of you. We delivered a solid first quarter with revenue growth at high end of our outlook range, year-over-year improvement in our adjusted profitability and gross margins, and strong adjusted earnings per share. Our pure AI revenues exceeded $125 million in Q1, up nearly 20% sequentially from Q4. This momentum gives us a strong line of sight to our 600 million target for the full year, even with the broader macro variability we have factored into our outlook. We also just announced a strategic multi-year applied AI partnership with Anthropic to accelerate the delivery of safe, reliable, enterprise-grade AI for our clients. As an Anthropic services partner, EPAM is building a dedicated practice for more than 10,000 cloud-certified architects, including a specialized cadre of 250 forward-deployed engineering blackbots. To date, over 20,000 ePammers have completed training via Entropic Academy, and more than 1,300 are already cloud certified. We expect to reach 5,000 certifications by end of Q3, with 10,000 by year-end. This is a further proof of our engineering expertise, our adaptability, advanced learning and education programs, and readiness for cloud within the enterprise. As we outlined at our recent investor day, we have a clear multi-year strategy to drive our next phases of profitable growth and further capitalize on the global AI transformation opportunities. Our aspiration is to become the go-to partner for enterprise AI transformation with a focus on three strategic pillars which are helping reshape the company. These pillars include establishing ourselves as a leading AI delivery software engineering services provider, transforming ourselves into an AI native organization and capitalizing on our AI native structure to expand go-to-market offerings. For 30 plus years of engineering DNA and heritage, expanding domain and vertical expertise, advanced IP and platforms, and deepening strategic partnerships continue to differentiate us and provide a durable advantage. Our mission is to win the build opportunity of our lifetime. The gap between the rapidly developing foundational AI capabilities and the ability of enterprises and societies to adopt AI safely, reliably, and with sustainable growing value will drive some of the largest technological investments humanity has ever made. This view was recently validated by our new partner, Entropic, and also by Nvidia's CEO, Jensen, during his interview with Dvorkes Patel. Today, we are moving beyond traditional IT services with a sharp focus on AI-native engineering and AI-native business transformation, which both continue to gain traction. At the same time, EPAM is fundamentally rethinking how the company operates, which goes beyond scaling adoption across 60,000 people. With our client zero mentality, we are engineering an entirely new operating model, one that dynamically blends human talent, AI capabilities, and advanced agentic systems to run the business faster, better, and at a lower cost across all geographies. early stage of this new blend is reflected in the number and the shape of AI native projects that we are starting with clients. AI Run went from being an SDLC transformation paybook to powering a series of AI Run transform motions that bring significant structure and value to our clients' own AI adoption approaches. ROI-driven Playbook uniquely brings together our engineering excellence with AI native delivery, coupled with strategic consulting and advisory teams, deep technical expertise, and partner ecosystem technologies. Unlike traditional consulting roadmaps and deployments, EPAM's AI-run transform integrates blueprints, talent, and tools into a single, proven, repeatable, and scalable transformation platform for our clients. We continue to create global go-to-market playbooks using proven methods across the globe. As a larger number of our AI programs are scaled into deployments, tokenomics, and implication for our engagement is becoming more significant. This is a generally new and consequential commercial construct and presents both challenges and opportunities for us and services components in general. As the industry works through the models, we intend to be ahead of the curve as we continue to evolve our approach to AI investment, pricing, client engagement, and delivery models for some quarters to come. One additional element of our strategy worth highlighting is the fact that we are now accelerating our deliberate go-to-market investments in our largest market in North America. These investments are modeled on what has proven to be successful in EMEA, evidenced by their industry-leading growth rate in Q1. Now let's turn to some quick Q1 highlights. In Q1, revenues grew 7.6% year over year with constant organic currency revenue growth of 3.7%. Five of our six verticals grew year over year, led by financial services and software and high tech, followed by consumer goods, retail and travel, emerging verticals and life sciences and healthcare. Across geographies, growth was led by email, delivered strong double-digit year-over-year growth. We are continually balancing our delivery locations and skill mix, adding new certification, domain specialization, and additional roles across our global pyramid. We also continue to proactively manage our commercial engagement types, driving new fixed price and other service deals while proactively managing localized branches. Now, turning to the demand environment. Overall, client sentiment remains stable through the end of Q1 with continued shift in spend towards AI native and strategic deployments. Clients continue to turn to EPAM for help in addressing the widening AI adoption gap. The need to modernize and build out AI foundation readiness remains critically important. Technical depth continues to mount, and the latest AI capabilities are making the backlog of required work evident, further underscoring our confidence that the build opportunity is a long-term one. As we look ahead, there's a more macro uncertainty today compared to 90 days ago. And our outlook reflects the broader variability we are seeing in the client decision making. We are particularly seeing underperformance in North America, and this is contributing to lower visibility in the second half. At the same time, our underlining momentum, particularly across our AI-native business, continues to build. However, macro volatility has introduced some additional caution in client decision-making, particularly on certain larger discretionary programs. While Q1 was not impacted, we are expecting some impact in Q2. Importantly, our client pipeline of AI programs and fundings remain strong. What we see is a temporary shift in timing and direction as clients respond with caution and pre-prioritize the short-term actions against the bigger transformation opportunity. Now, turning to AI. As we have all seen in the news, AI capabilities continue to advance extremely fast. The pace of technological change and digestion is unprecedented for enterprises as they face the challenge of balancing cost optimization and productivity with real business outcomes at scale. Further token usage and the associated economics are all becoming a more integral part of the investment thesis and business case. All this just increases complexity, which, as we stated at our investor day, unleashes new sets of requirements across all eight dimensions of the enterprise. EPAM remains in the sweet spot of helping enterprises close the AI adoption gap, solve their most complex challenges, and deliver quality AI-native enterprise-grade solutions at scale. We are working hard to further build and create high velocity performance teams within our AI native delivery engine to take advantage of larger growth opportunities. By design, our teams will bridge strategy to execution with a more consultative approach, all with deep domain and verticalization expertise. Looking across our top 100 clients, traction remains strong as more than 80% of our engaged in AI initiatives or AI run frameworks and tools continue to support hundreds of active AI native projects. Notably, we had more than 100 new AI native project launched in Q1 illustrating our active pipeline and help the replenishment of new opportunities. In terms of new deals, just since we shared our update at our AI Day, EPM is seeing an accelerating large deal pipeline focused on AI-enabled vendor consolidations, where EPM has significant opportunity to gain market share. These multi-year deals are larger than our historical norm, are expected to scale over time, and include a range of commercial models. The trajectory of this pipeline marks a meaningful step in EPAM's evolution as a strategic partner to enterprise clients. However, the full potential of these deals is not yet reflected in our outlook. Across our pure AI native revenues, our momentum continues and fundamentals remain intact with another quarter of double-digit sequential growth. Demand across our AI foundational services remains solid with faster growth in both our data and cloud practices as compared to the rest of the business. Importantly, we believe we can further accelerate capturing AI foundational demand with the deployment of more domain capabilities and forward deployed engineers to client engagements. This motion will take some time to scale, but we see this as a critical unlock to being able to deliver true business transformation to clients. Beyond transforming EPAM's business and go-to-market approach toward more outcome-based models, We are building not just an engineering mode, but a domain and context-based mode, anchored in playbooks built on successful engagements over time. Capturing the expertise at the source of these engagements further develops our playbooks into differentiated IP and ways of working. Here are some client examples to illustrate the shift. One, PDLC transformation for Nelnet, a global company specializing in consumer finance, student loan servicing, telecommunications, and education to explore the potential of GenAI tools to boost PDLC efficiency. To do that, EPAM developed a program to identify baselines and performance productivity benchmarks based on EPAM's AI-run transform. Nelnet achieved a 31% productivity increase, accelerated backend development by nearly two times, and empowered its teams to scale AI-driven innovation across the organization. We continue working with Nelnet to expand the PDLC program across the organization and continue building an enterprise governance model that scales. Two, modernize and upgrade global streaming infrastructure for a leading streaming platform client within the media entertainments serving 10 plus million concurrent users across 50 plus countries. With our partner EWS, we successfully transformed a fragile single region platform into a self-healing global system sustaining 99.99% uptime, without manual intervention. The solution deployed active-active EKS across more than six regions with automated IAC governance and standardized site reliability engineering practices. Together, we helped our client achieve 70% less configuration drift and zero downtime deployments. Three, bring the right AI and Gen AI programs from use case concepts to full-scale production deployment for a large global insurance company. Here, our Dial platform serves as both a domain playbook and a significant accelerator, integrating both upstream and downstream systems to ensure seamless end-to-end automation to assist the reinsurance clean department in first order of loss processing. EPAM automated billing reconciliation and streamlined reinsurance treaty analysis, proving the real world potential of AI in a highly regulated industry. After implementation, time to process first order of loss events decreased by 75%. Our efforts continue to be recognized, validating our strategy and the quality of our execution. So far in 2026, we have been honored to receive several key leadership distinctions. We earned two 2026 Google Cloud Partner of the Year awards for helping clients achieve measurable business outcomes through advanced AI and cloud technologies. The Sustainability Award highlighted our use of AI and geospatial technology to address environmental challenges, while Databases Award celebrated our scalable methodologies for enterprise cloud migrations, including our work with Deutsche Bank. EPAM was included in the Forrester Customer Experience Strategy Consulting Services landscape featuring providers that supports end-to-end CX transformation from visions through execution. EPAM named a leader in the IDC marketscape worldwide data modernization services provider for retail and restaurants. And finally, EPAM was ranked among the top three companies in Glassdoor's inaugural Best Companies in Tech and AI 2026 list, recognized for its culture of belonging, innovation, and leadership. These recognitions continue to reflect the hard work and dedication of our global teams and unwavering commitment to delivering tangible high-value outcomes for our clients. In summary, we are pleased with our first quarter results, which delivered the high end of our revenue outlook despite more uncertain macro environments, a solid foundation we intend to build upon throughout the year. we remain confident in our long-term strategy and vision in transforming ourselves into a global leader in AI transformation services, working to further capitalize on faster growing parts of the total IT and AI services market. Our underlining AI native and AI foundational readiness momentum remains strong and continues to resonate with our existing client portfolio, while we transform our go-to-market motions over the coming quarters to further expand our new client portfolio. While the macronomic environment has impacted visibility and added some variability, we feel good about our pipeline, including the larger strategic opportunities I described earlier, which represent a meaningful step in our evolution. Lastly, I want to thank you all for your continued commitment, trust, and support. Jason, over to you.

Thank you, FB, and good morning, everyone. In the first quarter, EPM generated revenue of $1.4 billion at the high end of our Q1 revenue outlook, delivering year-over-year growth of 7.6%. On an organic constant currency basis, revenue grew 3.7% compared to the first quarter of 2025. With improved year-over-year profitability in the quarter, gap income from operations grew by approximately 18%, and non-gap income from operations grew by over 14%. AI-native and AI-foundational revenues continue to contribute to year-over-year growth. With more than 125 million AI-native revenues in the quarter, this is the fifth consecutive quarter of sequential double-digit growth. Moving to our Q1 industry performance, we delivered broad-based year-over-year growth across the majority of our verticals. Financial services delivered strong growth, up 11.5% year-over-year, driven by asset management and insurance clients. Software and high-tech grew 10.9% year-over-year, driven by strong execution across existing clients and contributions from new logos. Consumer goods, retail, and travel delivered 7.2% year-over-year growth, notably driven by retail and consumer goods. Life sciences and healthcare increased 5.9% on a year-over-year basis. Revenue growth in the vertical continues to be driven primarily by clients in life sciences and medtech. Business information media decreased by 0.7% year-over-year, and our emerging verticals delivered year-over-year growth of 6.8%, primarily driven by ongoing strength in energy and government. From a geographic perspective, America is our largest region, representing 57% of our Q1 revenues, grew 2.5% year-over-year. EMEA, comprising 41% of our Q1 revenues, grew 15.9% year-over-year and 8.4% in constant currency. And finally, APAC, making up 2% of our revenues, grew 1.2% year-over-year. Lastly, in Q1, revenues from our top 20 clients grew 4.4% year-over-year, while revenues from clients outside our top 20 increased 9.1%. Moving down the income statement, our gap gross margin for the quarter was 27.7% compared to 26.9% in Q1 of last year. Non-GAAP gross margin for the quarter was 29.4% compared to 28.7% for the same period a year ago, demonstrating our commitment to improving profitability and gross margin during the fiscal year. GAAP SG&A was 17.1% of revenue compared to 16.8% in Q1 of last year. Non-GAAP SG&A and Q1 2026 came in at 14.1% of revenue compared to 14.2% in the same period last year. Gap income from operations was $117 million, or 8.3% of revenue, compared to $99 million, or 7.6% of revenue in Q1 of last year, and grew by 18% year over year. Non-GAAP income from operations was $201 million, or 14.3% of revenue, compared to $176 million, or 13.5% of revenue, in Q1 of the previous year and grew over 14% year-over-year. Our GAAP-effective tax rate, which includes a higher level of tax shortfalls related to stock-based compensation, came in at 31.6%, and our non-GAAP-effective tax rate was 23.6%. Diluted earnings per share on a GAAP basis was $1.52 compared to $1.28 in Q1 of last year, a 24-cent increase year-over-year reflecting growth of 18.8%. Our non-GAAP diluted EPS was $2.86 compared to $2.41 in Q1 of last year, a 45-cent increase year-over-year reflecting growth of 18.7%. In Q1, there were approximately 54.2 million diluted shares outstanding. Turning to our cash flow and balance sheet, cash flow from operations for Q1 was negative 36 million compared to 24 million in the same quarter of 2025. Q1 cash flow was negatively impacted in the quarter by higher variable compensation payments related to 2025 performance, as well as timing of certain vendor payments. Free cash flow was negative $54 million compared to free cash flow of $15 million in the same quarter last year. Cash and cash equivalents were just over $1 billion as of the end of the quarter. At the end of Q1, DSO was 76 days and compares to 72 days for Q4 2025 and 75 days for the same quarter last year. Share repurchases in the first quarter were approximately 1.8 million shares for $264 million at an average price of $143.84 per share. To date, since the initiation of our share repurchase program, we've returned approximately $1.5 billion in cash to shareholders. Moving on to operational metrics, we ended Q1 with more than 56,500 delivery professionals, reflecting total growth of 1.6% compared to Q1 2025. Our total headcount at quarter end was more than 62,750 employees. During the quarter, the company reduced headcount in Mexico, Additionally, there were targeted reductions in certain geographies as part of our cost optimization program. These actions produced a modest sequential decline in production headcount during the quarter. Utilization was 77% compared to 77.5% in Q1 of last year and 75.4% in Q4 2025. Q1 2026 utilization was impacted by the ongoing introduction of juniors who initially operate at lower levels of utilization. The addition of juniors is intended to improve our seniority index over time. Now let's turn to guidance. Before moving to the specifics of our 2026 and Q2 outlook, I'd like to provide some thoughts to help frame our guidance. We are encouraged by the momentum the company's AI offerings and resulting growth in our pure AI native revenues. And we remain confident in the medium to long-term strategic vision we set forth at our recent investor day. At the same time, we are seeing the ongoing uncertainty in the Middle East begin to have an impact on client decision-making. A subset of our clients are increasingly aware of the potential impacts on their businesses and are beginning to modestly delay decisions. This behavior became more apparent early in Q2 as we worked through April and moved into May. While client budgets remain intact for AI programs and other strategic investments, some clients are again focused on cost optimization, including vendor consolidations, as they assess and navigate the current economic environment. We continue to build a pipeline focused on larger revenue opportunities and are looking to close these in Q3 and Q4, driving higher levels of growth in the second half of the year. At the same time, we are now expecting that higher energy prices and global economic uncertainty will have an impact on our revenue growth rate for the year. As a result, we are lowering our full-year revenue growth outlook. we remain committed to improving overall profitability and gross margins. As usual, our guidance assumes that we will be able to continue to deliver from our Ukraine delivery centers at productivity levels similar to those achieved in 2025. Moving to our full-year outlook, revenue growth will now be in the range of 4% to 6.5%. Foreign exchange is expected to have a positive impact of approximately 1.5%. Therefore, the organic constant currency growth is now expected to be in the range of 2.5% to 5%. We expect gap income from operations to continue to be in the range of 10% to 11%, and non-gap income from operations will continue to be in the range of 15% to 16%. We expect our gap-effective tax rate to be 27%. Our non-gap-effective tax rate, which excludes the impact of benefits and shortfalls related to stock-based compensation, will continue to be 24%. For earnings per share, we expect that gap-diluted EPS will now be in the range of $8.29 to $8.59 for the full year. And non-gap-diluted EPS will now be in the range of $12.98 to $13.28 for the full year. We now expect weighted average share count of 52.7 million fully diluted shares outstanding. Moving on to our Q2 2026 outlook, we expect revenue to be in the range of $1.4 billion to $1.415 billion, producing year-over-year growth of 4% at the midpoint of the range. Our guidance reflects a 1.3% positive foreign exchange impact during the quarter, producing organic constant currency growth of 2.7% at the midpoint of the range. For the second quarter, we expect gap income from operations to be in the range of 9% to 10% and non-gap income from operations to be in the range of 15% to 16%. We expect our gap effective tax rate to be approximately 27% and our non-gap effective tax rate to be approximately 24%. For earnings per share, we expect gap-diluted EPS to be in the range of $1.79 to $1.87 for the quarter, and non-gap-diluted EPS to be in the range of $3.10 to $3.18 for the quarter. We expect a weighted average share count of 52.4 million diluted shares outstanding. Finally, a few key assumptions that support our gap to non-gap measurements for Q2 and the remainder of the year. Stock-based compensation expenses expected to be approximately 50 million for Q2 and 44 million for each of the remaining quarters. Amortization of intangibles is expected to be approximately 17 million for each of the remaining quarters. The impact of foreign exchange is expected to be an approximate 3 million loss each quarter. Tax effect of non-GAAP adjustments is expected to be around $19 million for Q2 and $14 million for each of the remaining quarters. We expect $2 million excess tax shortfall in Q2, negligible in Q3, and $1 million in Q4. Expenses associated with the 2025 Cost Optimization Program are expected to be $13 million in Q2. And one more assumption outside of our gapped non-gap items. We now expect interest and other income to be $1 million in Q2, $2 million in Q3, and $4 million in Q4. Lastly, my continued thanks to all our ePammers for their dedication and focus on serving our clients and driving results throughout 2026. Operator, let's open the call for questions.

We will now move to our question and answer session. As a reminder, if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. When you are called on, please unmute your line and ask your question. Please limit your inquiry to one question and one brief follow-up. Our first question comes from Brian Bergen from TD Cohen. Please unmute your line and ask your question.

Hi, guys. Good morning. On the 2026 guide, on the organic growth guide revision, so is this a handful of large engagements that are just moving slower or a broader portfolio dynamic? And what gives you the confidence on the second half implied sequential growth, just given where the 2Q number is? Are you assuming geopolitical volatility moderates to hit that revised target? Do you have things in hand? Maybe a little detail on that.

Yeah, I guess I'll talk a little bit about the impact that we're seeing as we look at Q2. And I would say it's probably more of a handful of customers where decision making does seem to be somewhat delayed. And again, we began to see that probably more so in April and May. And then I think FB probably could update us on some of the larger deal opportunities in the second half.

Hi Brian, how are you doing? So number one in our estimate, we are not kind of considering that the geopolitical environment changes significantly. So we are guiding as we see it right now. So we're not assuming anything significantly changing in the current geopolitical setup. At the same time, we have quite a bit of, as in the prepared remarks I highlighted, large, unusually large opportunities which we are targeting. We are currently not really sure yet how fast they're going to ramp, how fast they're going to close. but we are actually went after a piece of market which was previously was not open to us, but I already became available due to our AI native and or AI run capabilities, which opened us for large vendor consolidation, large transformation and deals, which is for us was outside of our normal norm. So that's what's included in our current guide.

Okay, understood. And my follow ups on the anthropic relationship. So good to see that come through. Can you talk about how different that model is relative to your your heritage delivery approach? I'm trying to understand how difficult of a pivot that may be for you. And do you see that relationship potentially driving an inflection in your AI native revenue growth mix?

I think entropy is going to be a very important relationship for EPAM. I think we are following a playbook which we've done before. We prepared pre-prepared engineers with our internal development. Once commercial products became available and certification quickly, we pivoted towards and certified our engineering team. I just checked this morning, we are over 1400 certified cloud architects as of this moment. So it's ramping up pretty nicely. And we will be going to the market together with OnTropic and bring to the market applied AI solutions. I think it will be similar to the go-to-market movements like what we've done previously, but clearly this is in the AI era. We will be focusing on AI native, applied AI transformations to bring safe AI capabilities to the enterprise. I don't think it's a pivot, it's an expansion, and we are hoping to see acceleration from this partnership.

Okay, thank you.

Our next question comes from Maggie Nolan from William Blair. Please unmute your line and ask your question.

Hi, thank you. Maybe to follow up on that subset of clients that are seeing a little bit of weakness there, does the full year guidance range consider any broadening of this weakness beyond that subset of clients that are currently affected? And maybe can you help us understand if that's a specific vertical or why or why not you wouldn't see that broadening?

Yeah, so, you know, I think the reflection in the lowering the bottom end of the range obviously would sort of, if we were to end up closer to that portion of the growth range, that clearly Maggie would reflect that we saw a somewhat broadening of the delayed decision-making. So again, we took the top down because we sort of have a less rapid entry into the second half. We still feel good, as Effie said, about some of the larger opportunities that we're looking to close here in the second half. But the bottom end of the range clearly would reflect that there's some broadening of the delayed decision-making process.

And talking about impacts, I think clearly already we see see some of these impacts coming in from traveling consumer sector. It's well understood for the reason and right now clearly our financial services or in our in our high tech environment, we continue to see strong demand.

Okay, thank you. And then Jason, can you sort of bridge the gap for us between, you know, the non-gap operating margin that you saw in the quarter of 14.3 to kind of the full year target range and the kind of 15 to 16% range?

Yeah. So, you know, I think probably the best way to look at profitability and is really to compare kind of year over year. And so we always have seasonal factors where Q1 is lower from a profitability standpoint. You've got the reset of the social security clocks. You also generally have that slow January that we talked about. And those things usually sort of result in sort of lower profitability in Q1. I think where I feel actually very positive, if I compare Q1 to Q1, we've got improvement in gross margin, which is the first time that we've seen that in quite a long period of time. And it's consistent with the expectations that we set that we would be working on improving profitability throughout the year. What you should see, Maggie, is improved gross margin as we go from Q1 to Q2. Some of that is seasonal. But again, we continue to sort of focus on profit improvement while trying to drive top line revenue growth and certainly being successful with the transformation opportunities.

Thank you.

Thank you. Our next question comes from Jason Cooperberg from Wells Fargo. Please unmute your line and ask your question.

Good morning, guys. Thanks for taking the question. Just wanted to see if we can put a finer point on quarter-over-quarter revenue growth expectations for Q3 and Q4. I mean, we know what typical seasonal patterns look like, but would be curious what your base case looks like there, just given the moving parts in the macro.

Yeah, I'll talk to, I guess, maybe just about what my model looks like, and I'll let FB sort of provide more color to the client opportunities. I mean, usually what we would see is stronger sequential growth between Q2 and Q3 driven by seasonal factors, the additional available bill days. And then we're also factoring in some subset of the deals that we're working on that those would win and begin to ramp. We clearly have a higher growth rate in the second half than we have in the first half. And again, that's driven by the opportunities that are within our line of sight at this time.

And what brings us this confidence and what we're counting on, we have quite a few deals which we already know is going to start in the Q3. We also have a pipeline of large opportunities which we're working to close and start to ramp in Q3 and Q4.

So yeah, so that's what I wanted to follow up on. So those large opportunities, those vendor consolidation deals, it sounds like there's, I don't know if there's maybe two or three of them, maybe you can clarify that, but it sounds like you do have something in your back half guide for those, I guess maybe on a risk adjusted basis, if you can just clarify that and then just say a little bit more about the nature of the work that is comprising those large pipeline opportunities for the second half. Thank you.

It's no longer just three or four. We're actually talking about close to 10 opportunities at this point of time. These opportunities outsize in terms of range. All of them are non-TNM, so different commercial models combining AI tokenomics in the picture themselves. It's a variation of business transformation, vendor consolidation, and the size is really outside of EPAM's norm, what we typically do.

And then Jason, clearly there's a number of opportunities and from a risk adjusted standpoint, obviously we're not assuming that we capture all those. We're just capturing a small subset and then that helps contribute to the growth in the second half of the year.

Makes sense.

Thank you, guys. Thank you. Thank you. Our next question comes from Jamie Friedman from Susquehanna. Please unmute your line and ask your question.

Hi, good morning. Thanks for the opportunity. I'll just ask my two together in the interest of time. Jason, I want to get your perspective on the outlook that you had provided longer term at the analyst day for 2020, you know, the period 2027, 2028. There were assumptions about the improvement of gross margins, which you delivered in the first quarter. And then SG&A efficiency, I think 20 to 30 basis points. So anyway, if you could share that 16, I think it was 16% objective in the margin. And then FB, I'd be interested. So in your prepared remarks, you were mentioning that you're seeing opportunities in AI-enabled vendor consolidation markets. So I was hoping you could elaborate on that. What's that about? Thank you.

Yeah, just quickly on profitability. So we did get price in Q1. We're focused on improving some utilization. I think we've done a nice job with our cost optimization program and kind of getting us into good shape. The cost of our bench is somewhat lower. So all the things that we talked about doing, including improving the seniority index, all of that's in process. And as a result, you see better gross margin. Q1 of 2026 to Q1 of 2025. I also expect you will see better gross margin Q2 2026 to Q2 2025. So I think that whole journey of improved profitability, we're certainly, I would say, on our way. We're not expecting so much SG&A optimization this year. That would come more in those out years. In this year, I think you'll see us do more with sort of go-to-market investments as we talked about during IA Day. Then I guess I'll turn it over to FB.

Absolutely. Thanks, Jason. So during IAD, we kind of talked about and demonstrated our AI capabilities. We talked to you about level one, level two, level three level of AI capabilities and SDLC maturity. in these larger deals in vendor contradictions and also in enterprise ai transformation we're deploying the best of epam or ai run transform playbooks and this is a combination of our global capabilities augmented with ai where we are able to bring a very differentiated and i would call uh kind of challenging proposition to our clients, which very much challenges the status quo in the vendor landscape. And that's what we are doing right now with our larger clients.

Thank you both. Our next question comes from David Graceman from Stifle. Please unmute your line and ask your question.

Thanks. Good morning. So I know this has come up in a couple of the previous questions just about the disability on the back half of the year and the guide. But historically, you've done a really good job of framing the low versus the high end and what needs to happen. So perhaps you can take some of the data points that you share already and maybe put that in the context of the range, what happens at the low end, what happens at the midpoint versus the high end.

Yeah, so I think probably the first thing is that we're not assuming an improvement in the economic environment. So on the lower end of the range, you probably have maybe some further worsening. You also have maybe more of what we referred to earlier, where you do have some clients sort of delaying sort of spending decisions. And so again, that would probably just be incremental kind of uncertainty and incremental kind of delays in decision making. On the higher end of the range, you know, it's both sort of solid execution in the traditional book of business, and then probably a somewhat higher share of wins in these larger deals that FB have been talking about. Again, we have, you know, throughout the year and even when we guided during our Q4 call, We always expected a stronger growth rate in our second half, in part driven by these deals that we've kind of been focused on in developing over the last sort of quarter or two. That sufficient, David, or anything else?

Well, I'm just curious, you know, can you still hit the midpoint in the range if we see a continuation of this environment where these larger deals continue to get pushed out?

I think the question, David, is where the environment is the current... For the mid-range, I don't think we need to win too many of those deals. So actually, we're not that much counting on them on the mid-range. But if the environment continues to get worse, that's clearly challenging for the mid-range. So mid-range is steady execution, the usual conversion, typical EPAM style deal structures in order to achieve the mid-range.

Yeah, that's great. Thank you for that. If I heard you right, I think you said that North America was where you were seeing the most incremental weakness. And you also said that that's where you're focusing your go-to-market investments. So the go-to-market investments were similar to some of the prior cycles we've been through. So I don't know. Did I get that right? And if I did, could you maybe at least provide some clarity around that dynamic and where those investments are going? Yeah.

David, absolutely. I mean, even already in IAD, we called out the go-to-market investments, although we were not that specific, but actually highlighted that we brought in a new chief marketing officer who started and worked focusing on performance marketing. We talked to you about how the market changed, moving away from sellers to much more of a buyer's market. We didn't highlight it, but we already, at that point of time, was thinking about the North American market itself. So what we're going to start doing is applying all the learnings and the investments, what we've done, and understanding what we've done in the EMEA market and bring it to the North American market. Clearly, it's going to be investment in personnel, investment in process, investment in changes and transformation of our go-to-market motions in North America.

Got it. Thanks very much.

Our next question comes from Jonathan Lee from Guggenheim. Please unmute your line and ask your question.

Great. Thanks for taking my question. You highlighted large multi-year deals in the pipeline that are larger in scale than what EPAM has historically pursued. What gives you confidence in your ability to close and execute on those engagements? Do you have the sales muscle, governance frameworks, and delivery infrastructure to manage those programs in that magnitude? and how should we think about the profile of these deals as it relates to competitive dynamics and deal size and margin profiles relative to what you currently see?

Jonathan, great question. Clearly, I think it was also kind of a surprise how successful our offerings have been with our clients. We didn't expect this amount of pipeline being built with these differentiated offerings. I think, do we have the sales muscle to to close them to convert them or to ramp them up that's why we are risk adjusting the pipeline itself and we are not fully including them the same way as we include other deals because we actually are on we are not sure that how fast they're going to convert and how fast they're going to ramp so that's with all honesty right so yes we have the sales muscle to actually get into these opportunities i think the offering is differentiated enough and resonates really really well with our clients because we bring AI native capabilities to these deals and we are disrupting the status quo. In terms of scaling these opportunities and governance in place, EPAM has an experience running large programs, but in the past, those programs were built bit by bit, not one big opportunity. So yes, we were running these opportunities before as an aggregate, but we never really wanted us one go. So that's the difference. The same time, I think what you asked about profitability, clearly what we can tell you is that our current AI native business or portfolio, which is over $125 million per quarter, is run higher profitability than the EPM average. So that's what we see.

Got it. Thanks for that color. And just as a follow up, you know, where do we stand on the large near risk client? Did revenue stabilize in Q1 as expected? Or are you seeing incremental deterioration there? And what does this imply for the remainder of the year?

Yeah, so the decline did stabilize. Revenues were as expected. I think we would see probably some very modest sequential decline over the next quarter or two. But again, it's something I would still put very much in a stable camp. And then in terms of the rest of the book of business there, we are seeing solid growth in their book of business in the Iberian Peninsula. We're also seeing growth throughout South America. And so we feel generally good about the book of business there with the exception of some slowness in Mexico and with that large customer.

I appreciate that detail.

Thank you. Thank you.

Good morning. Thanks for taking my question. I was wondering if you could maybe comment on, to the extent that the large deals convert into revenue beginning in the back half and heading into 2027, what would be the impact, do you think, on margins? Would they be coming in at or below sort of your corporate average?

Yeah, we're still looking at, you know, improved gross margin on a year-over-year basis. There's always seasonal impacts. And so, again, Q3 would have generally higher profitability just because it's got higher bill days. And so I think what we'll all have to be looking at is just, you know, Q1 to Q2, Q2, Q3 to Q3. Sometimes as you bring in deals, there is, you know, a modest kind of impact as you sort of do the transition or what's called, you know, KT or knowledge transfer. But I think what you'll find is that, you know, with our focus on improving profitability in India, reducing the cost of the bench, improving utilization, and focus on sort of improving fixed fee profitability, I feel comfortable that we can continue to improve profitability.

Thank you. And then maybe as a follow-up, on capital allocation, given what the stock has done, can you give us kind of a refresher on your latest thoughts on the relative uses of cash between buybacks at this point and incremental M&A from new capabilities? Thank you.

Yeah, so we did the accelerated share repurchase. There's kind of a true piece of that that will show up in Q2, and we will also be probably doing incremental repurchases when the market opens again next week. At the same time, I think we are looking ahead to sort of the second half of the year. You might see us begin to, again, prioritize sort of M&A related investments. But certainly with the share price at this level, you'll continue to see some amount of generally open market purchases of the stock.

Our next question comes from Brian Keane from Citi. Please unmute your line and ask your question.

Hi, guys. Thanks for taking the questions. FB, can you talk a little bit about contract pricing and how those dynamics have changed over the last year or so? In particular, something like the Anthropic deal, the partnership there, how are you going to recognize revenues in that contract and that partnership? Is it any different than the model's been over the last few years?

Brian, it's a good question. I think it's a moving target. As we highlighted, the tokenomics continues to be a subject which we are exploring. At this point of time, we are in most client relationships or clients are bearing the cost of the tokens. I don't know how it's going to change. We are in discussion with quite a few clients, how would that transition. So on Tropic, in this sense, it's not different. Our relationship, we will be... expecting to develop software using the Anthropic stack with the models, the tools themselves. And right now we are in various cases we're exploring different commercial models how we can actually charge the tokens, or the client pays for the tokens, or what is the commercial model going forward. It's complicated in a sense because it's impacting certain security considerations, and I think it's an open subject which we continue to work with our partners, with our clients, and with Anthropic themselves. In terms of, I think, pricing, I think Jason was very pleased to see even rate increases in the first quarter. So we are actually not seeing what we call rate compression at this point of time. We were quite successful for a small minority of our clients to negotiate rate increases. So overall, we are not seeing that type of market pressure.

Got it. And then just as a follow up, Jason, I saw that that sequentially headcount was down and then obviously revenue per head was up in the first quarter. How do we think about the rest of the year to hit the guidance? You know, maybe sequentially, how should we think about the headcount cadence and the revenue per head? Thanks.

Yeah, so I think with Q1, you know, clearly we've talked about the lead customer in Eurus. And so we did see some reduction in headcount in Mexico. And we continue to make some adjustments in different locations that kind of improve utilization and decrease the cost of our bench. I do think you'll see, you know, headcount additions throughout the remainder of the year. The revenue per headcount is usually not a calculation that I do. And you always have to remember the foreign exchange also plays a role in that. But as Effie indicated, we did get rate in Q1. And so that was positive and did help with profitability. you know, and throughout the remainder of the year, I think you'll see, you know, ongoing headcount to support business growth. But again, you know, I think you'll also see some adjustment in sort of contract structures. And so I think the whole calculation of revenue per head is probably a conversation we'll be having kind of later in the year. But again, we feel good about, you know, the growth associated with some of these larger revenue opportunities.

Okay.

Thanks so much. Thank you.

Our next question comes from Arvind Ramnani from Truist. Please unmute your line and ask your question.

Hey, thanks. Thanks for taking my question. Yeah, I just wanted to ask, right, like, I mean, it looks like you kind of lowered the guidance on, you know, sort of like existing customer weakness. And then I think what you all have said Describe as, uh, you know, sort of in order to hit your guidance for the full year, um, there's some, you know, I guess, prospective clients of pipeline or some of the pipeline needs to convert. It seems like it's, you know, kind of like if, if visibility at existing clients wasn't like kind of properly accounted for, like, how are you getting confidence that the prospective clients will actually convert to revenue, you know, on time in order for you all to hit, hit, hit your guidance numbers.

Yeah, I think maybe the first thing to just remember is I don't think any of us thought that what happened in the Middle East was going to happen and it was going to go on for as long as it's gone on for. So, you know, we are seeing some impacts from that. And then from a deal standpoint, you know, there are, you know, a significant number of opportunities, Arvind, and we're, you know, just counting on, you know, a modest share of those to convert. And so, again, that's why we think that it's an appropriate guidance and why we also think that there's also opportunity to get to the higher end of the range.

That's terrific. And then just on the topic of AI, right? I mean, certainly kind of you're seeing kind of good traction out there. I mean, is there any sort of like revenue cannibalization or workflow cannibalization or displacement of like some of the legacy work, you know, as some of the AI work ramps up?

Arvind, I mean, clearly there is some impact. Clients shifting some of the IT budgets towards AI spending and also they increasingly automating parts of the SDLC, for example, testing itself. And probably they are diverting investments away from digital platform, e-commerce platform build-outs towards new AI native products or AI native platforms construction. So that's the shift what we are seeing right now.

Great. And this last question, you know, just with these advancements in model capabilities, we have seen, you know, both across anthropic and open AI, just in the most recent model releases, are you all proactively going to some of your clients and saying like, hey, you know, we can use some of these improvements in sort of AI to kind of lower headcount on certain projects? Are you all offering that up at least at a few clients or not really seeing the dynamic?

So we are going to the clients with very advanced engagement model. This is what I highlighted. When you were in the IA day, we demonstrated dark factory capabilities. And yes, we are proactively talking to our clients, how we can introduce them, how we can actually provide them dark factory-based, fully autonomous application maintenance and support capabilities, how we can automate large part of the testing flows. So this is all part of the go-to-market movement, which we launched earlier this year.

Perfect. Thank you so much.

Our final question today comes from Jane Fawcett from Morgan Stanley. Please unmute your line and ask your question.

Thank you very much. Just a couple of quick follow up questions on margins. You know, I think you, Jason, you've talked about like what you're planning to do, but especially on these longer duration projects and if we're starting to factor in tokenization or token costs, excuse me. how do you think about the levers that you need to control or what kinds of relationships and that kind of thing do you need to develop? And then I'll just throw in my second question simultaneously. For loud and clear, your potential interest in revisiting M&A, especially in the latter part of this year. Can you give us a little bit of view on in terms of what you might be looking at, what makes sense and what valuations are doing in the types of acquisitions you could be looking at? Thanks.

James, I think this is a great question. And it's so funny that so few people actually really ask about tokenomics. What you need to do is you need to control multiple aspects. You need to, first of all, control the model usage. What task, which model you are using, what is the frequency of that model? You need to have the right blend of model. So what we are building out is this blending capability which is where for each particular task you need to select the right model which is able to execute but cheap enough to deliver the ROI. The same time you also have to recognize that you can buy the same token from the same model from multiple sources. So you need to have the multi-sourcing capability, somehow akin to a trading desk, which allows you to purchase the same model, same capability from various sources. And we need to develop this capability, how to manage these contracts, how to manage our consumption, and how to buy the same tokens related to price, availability, cash hit limits. All of these are influencing the pricing at the end. you can achieve real differentiation in terms of pricing and profit levels if you correctly control the sourcing and the usage of models themselves. In terms of M&A, I turn over to Jason.

Yeah, so I think that we continue to focus on domain capabilities, probably data assets, and then, you know, some of the geographic opportunities that we talked about in the past, allowing us to expand our position, most likely in Asia PAC. And so kind of similar to what we've talked about in the past, again, I think you're not likely to see anything in the very near future. but maybe later in the year. And then just quickly from a valuation standpoint, I think we continue to see what in our eye is still a little bit of a disconnect between private market expectations and kind of public market valuations. But we continue to be engaged with the potential targets and I guess kind of stay tuned.

Thanks, guys.

This concludes the question and answer session. I'd now like to turn the call over to Bilesh Vaish for closing remarks.

Thank you all for joining us this morning. And we're going to see you guys in three months. Thank you. Thank you for joining. You may now disconnect.